The Senate passed a bill this week that would allow companies to use a 25-year average of corporate bond yields when calculating their defined-benefit pension liabilities. If the measure becomes law, it could greatly reduce the contributions companies have to make to their pension plans, but it’s not clear whether the House will adopt the Senate provision.
The Senate measure is contained in S. 1813, a transportation funding bill. Kathryn Ricard, senior vice president of retirement policy at the ERISA Industry Committee, which represents major U.S. employers, says that a bill to extend transportation funding that the House produced in February did not include the pension provision.
At year-end 2011, the corporate discount rate was about 5.5%, says Andrew Wozniak, director of portfolio management and investment strategy at BNY Mellon Asset Management. The 25-year average for long-term AA bonds was 7.13%, he says, with the low end of the 10% corridor at 6.42% and the high end at 7.85%.
Since the 5.5% rate would be outside the 10% corridor, the Senate measure would have companies use the low end of the corridor, 6.42%, instead. The difference of about 100 basis points on the rate would mean a 10% to 15% decrease in plan liabilities, Wozniak says. “That would make the funding status higher, and therefore they wouldn’t have to put as much money in the [pension] trust.” He estimates aggregate corporate pension plan contributions this year could be cut by as much as two-thirds.